The government?s plan to set up a Financial Holding Company (FHC) for infusing capital into banks has been put on the back-burner. Government sources say the finance ministry will, instead, directly pump money into the public sector banks (PSBs). The government will provide pure equity to banks, and refrain from issuing any debt-linked instruments, they said.
In the Union Budget 2012-13, former finance minister Pranab Mukherjee had said the government was examining the possibility of creating an FHC, which will raise resources to meet the capital requirements of PSBs.
The government has budgeted to provide for capital of R15,888 crore into state-owned banks and financial institutions in the current financial year. These funds were earlier to be infused through the FHC, but that is unlikely to happen now. One reason the proposed FHC has been delayed is that the Reserve Bank is yet to finalise its guidelines on holding companies.
The department of financial services has held several talks with the banks to assess their capital needs for the current fiscal. Country’s largest lender State Bank of India is expected to get capital of R3,000-4,000 crore in this fiscal. The holding company was expected to substantially leverage its capital base and help the government infuse funds into banks without stretching the fiscal deficit. The government is already hard-pressed to contain the fiscal deficit to the target of 5.1% for the current financial year.
The Centre provided capital of R19,540 crore to the PSBs in 2011-12, against budget estimates of R6,000 crore for the year. In its report submitted last December, a committee headed by finance secretary RS Gujral, to estimate capital requirements of financial institutions, pegged PSBs capital requirement at R4 lakh crore for a period of ten years.
Capital infusion into PSBs is critical to support their bankrolling of the economy. As a short-term measure, it is also necessary to provide for the rising non-performing assets (NPAs) in the system.
As on March 31, 2012, NPAs grew at 43.9%, far outpacing credit growth of 16.3% during the same period, as per RBI data. Banks? gross NPA ratio rose to 2.9% as on March 31, 2012, up from 2.4% as on March 31, 2011. State-owned banks have shown a significant jump in restructured assets and NPAs in recent quarters.
